<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
__________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0717085
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
--------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check X whether the Registrant has filed all reports required to
be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: There were 6,802,442 shares
of the Registrant's common stock outstanding as of October 30, 1998.
<PAGE>
FIDELITY BANKSHARES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements............................................................1
Consolidated Statements of Financial Condition as of
December 31, 1997 and September 30, 1998........................................2
Consolidated Statements of Operations for the
three and nine months ended
September 30, 1997 and 1998.....................................................3
Consolidated Statements of Comprehensive Operations
for the three and nine months ended September 30, 1997 and 1998.................4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1998........................................5
Notes to Consolidated Financial Statements......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................12
PART II. OTHER INFORMATION................................................................20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
December 31, September 30,
1997 1998
============================
<S> <C> <C>
(In Thousands)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................................... $ 22,136 $ 20,489
Interest-bearing deposits................................................................... 33,688 42,135
--------- ----------
Total cash and cash equivalents....................................................... 55,824 62,624
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities............................................................ 16,077 18,966
Mortgage-backed and other securities........................................................ 234,132 407,237
--------- ----------
Total assets available for sale....................................................... 250,209 426,203
LOANS RECEIVABLE, Net (Notes 2,3).................................................................. 861,257 937,090
OFFICE PROPERTIES AND EQUIPMENT, Net............................................................... 21,440 33,835
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market................................... 11,955 15,753
REAL ESTATE OWNED, Net............................................................................. 967 225
ACCRUED INTEREST RECEIVABLE........................................................................ 6,404 7,613
OTHER ASSETS....................................................................................... 12,211 15,099
========= ==========
TOTAL ASSETS....................................................................................... $1,220,267 $1,498,442
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS........................................................................................... $ 872,340 $1,037,727
OTHER BORROWED FUNDS............................................................................... 3,780 4,697
ADVANCES FROM FEDERAL HOME LOAN BANK............................................................... 239,091 305,070
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE...................................................... 2,783 15,117
DRAFTS PAYABLE..................................................................................... 5,349 3,701
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES.............................................................. - 28,750
OTHER LIABILITIES.................................................................................. 9,038 11,050
DEFERRED INCOME TAXES.............................................................................. 499 1,059
--------- ----------
TOTAL LIABILITIES........................................................................... 1,132,880 1,407,171
--------- ----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued.......................................... - -
COMMON STOCK ($ .10 par value) 8,200,000 authorized shares,
6,784,958 shares outstanding at December 31, 1997, and 6,802,442 shares
outstanding at September 30, 1998........................................................... 678 680
ADDITIONAL PAID IN CAPITAL......................................................................... 38,347 38,817
RETAINED EARNINGS - substantially restricted....................................................... 47,943 51,562
TREASURY STOCK, at cost (40,000 shares at September 30, 1998)...................................... - (962)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN............................................ (986) (740)
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 6).................................................... 1,405 1,914
--------- ----------
TOTAL STOCKHOLDERS' EQUITY (Note 4)......................................................... 87,387 91,271
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................................... $1,220,267 $1,498,442
========= ==========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
=============================================================
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans........................................................... $ 14,911 $ 18,030 $ 42,432 $ 53,463
Investment securities........................................... 187 270 538 779
Other investments............................................... 465 907 1,419 2,511
Mortgage-backed and other securities............................ 3,121 6,295 7,989 16,030
-------- -------- -------- --------
Total interest income..................................... 18,684 25,502 52,378 72,783
-------- -------- -------- --------
Interest expense:
Deposits........................................................ 8,815 11,817 24,707 32,815
Advances from Federal Home Loan Bank and other borrowings....... 2,035 5,238 4,989 14,630
-------- -------- -------- --------
Total interest expense.................................... 10,850 17,055 29,696 47,445
-------- -------- -------- --------
Net interest income.................................................. 7,834 8,447 22,682 25,338
Provision for loan losses............................................ 57 6 129 (43)
-------- -------- -------- --------
Net interest income after provision for loan losses.................. 7,777 8,441 22,553 25,381
-------- -------- -------- --------
Other income:
Servicing income and other fees................................. 899 1,185 2,562 3,397
Net gain on sale of loans, investments
and mortgage-backed securities............................ 796 555 808 1,979
Miscellaneous................................................... 95 686 325 1,251
-------- -------- -------- --------
Total other income........................................ 1,790 2,426 3,695 6,627
-------- -------- -------- --------
Operating expense:
Employee compensation and benefits.............................. 3,579 4,165 10,395 12,003
Occupancy and equipment......................................... 1,227 1,510 3,612 4,471
Loss on real estate owned....................................... (145) (98) (94) (64)
Marketing....................................................... 150 159 498 598
Federal deposit insurance premium............................... 117 141 338 408
Other........................................................... 1,145 1,492 3,332 4,299
-------- -------- -------- --------
Total operating expense................................... 6,073 7,369 18,081 21,715
-------- -------- -------- --------
Income before provision for income taxes............................. 3,494 3,498 8,167 10,293
-------- -------- -------- --------
Provision for income taxes:
Current......................................................... 1,377 1,234 3,197 3,703
Deferred........................................................ 107 124 261 364
-------- -------- -------- --------
Total provision for income taxes.......................... 1,484 1,358 3,458 4,067
-------- -------- -------- --------
Net income........................................................... $ 2,010 $ 2,140 $ 4,709 $ 6,226
======== ======== ======== ========
Earnings per share (Note 5):
Basic........................................................... $ 0.30 $ 0.32 $ 0.71 $ 0.93
======== ======== ======== ========
Diluted......................................................... $ 0.30 $ 0.31 $ 0.70 $ 0.91
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- -----------------------------------------------------
<TABLE>
<CAPTION>
Unaudited Unaudited
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
=========================== ==========================
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Net income........................................................... $ 2,010 $ 2,140 $ 4,709 $ 6,226
Other comprehensive income, net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period......... 909 648 922 1,115
Less: reclassification adjustment for gains realized
in net income................................................ (414) (286) (414) (606)
-------- -------- -------- --------
Comprehensive income (Note 6)........................................ $ 2,505 $ 2,502 $ 5,217 $ 6,735
======== ======== ======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Unaudited
For the Nine Months Ended
September 30,
1997 1998
===========================
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income..................................................................................... $ 4,709 $ 6,226
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization......................................................... 956 1,216
ESOP and Recognition and Retention Plan compensation expense.......................... 518 630
Accretion of discounts, amortization of premiums, and other deferred yield items...... (526) 352
Provision for loan losses and real estate losses...................................... 129 (43)
Provisions for (gains) losses and net (gains) losses on sales of real estate owned.... (115) (48)
Net (gain) on sale of:
Other assets................................................................... (702) -
Loans.......................................................................... (106) (1,000)
Corporate bonds................................................................ - (108)
Mortgage-backed securities..................................................... - (869)
Increase in accrued interest receivable........................................................ (1,082) (1,209)
Increase in other assets....................................................................... (800) (1,527)
Increase (decrease) in drafts payable.......................................................... 532 (1,648)
Increase in deferred income taxes.............................................................. 614 560
Increase in other liabilities.................................................................. 625 1,940
--------------------------
Net cash from operating activities............................................. 4,752 4,472
--------------------------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans.............................................. (91,526) (88,561)
Principal payments received on mortgage-backed securities...................................... 14,882 83,086
Purchases of:
Loans................................................................................. (22,633) (34,914)
Mortgage-backed and other securities.................................................. (72,076) (239,108)
Corporate debt securities............................................................. - (55,431)
Federal Home Loan Bank stock.......................................................... (837) (4,974)
Investment securities................................................................. (7,782) (4,989)
Office properties and equipment....................................................... (3,755) (13,737)
Proceeds from sales of:
Loans................................................................................. 5,713 47,771
Federal Home Loan Bank stock.......................................................... - 1,175
Corporate debt securities............................................................. - 9,843
Real estate acquired in settlement of loans........................................... 1,165 1,482
Mortgage-backed securities............................................................ - 27,523
Office properties and equipment....................................................... - (7)
Proceeds from maturities of investment securities.............................................. 4,000 2,220
Other.......................................................................................... 467 2,365
--------------------------
Net cash used for investing activities......................................... (172,382) (266,256)
--------------------------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock................................................... 263 74
Purchase of Treasury Stock..................................................................... - (962)
Sale of subordinated debentures, Net.......................................................... - 27,389
Cash dividends................................................................................. (1,858) (2,534)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts................................... 13,490 18,904
Certificates of deposit............................................................... 82,971 146,483
Advances from Federal Home Loan Bank.................................................. 57,172 65,979
ESOP loan............................................................................. (207) -
Other borrowed funds.................................................................. 2,642 917
Advances by borrowers for taxes and insurance......................................... 10,151 12,334
-------------------------
Net cash from financing activities............................................. 164,624 268,584
-------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................... (3,006) 6,800
CASH AND CASH EQUIVALENTS, Beginning of period................................................. 42,420 55,824
-------------------------
CASH AND CASH EQUIVALENTS, End of period....................................................... $ 39,414 $ 62,624
=========================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Savings Bank of Florida (the
"Bank") conform to generally accepted accounting principles and to predominant
practices within the thrift industry. The Company has not changed its
accounting and reporting policies from those disclosed in its 1997 Annual Report
on Form 10-K.
On January 21, 1998 the Company issued $28.375 million of mandatorily
redeemable, Preferred Securities out of a grantor trust, Fidelity Capital Trust
I, a Delaware statutory trust, which was created by the Company for this sole
purpose. As its only asset, the trust holds junior subordinated debentures due
January 31, 2028 of the Company, purchased with the proceeds of the preferred
security's issuance. Interest from the junior subordinated debt securities is
payable quarterly at a rate of 8.375%, annually. The interest will be used to
fund distributions quarterly at the rate of 8.375% on the Preferred Securities.
As a result of the above, the Preferred Securities of the trust are considered
fully and unconditionally guaranteed by the Company.
Distributions on the Preferred Securities are cumulative and are payable at the
same rate as the junior subordinated debentures, described above. The junior
subordinated debentures are redeemable in whole, in the event the Company's
mutual holding company parent converts to stock form beginning January 31, 2000
at 107% of principal amount and in any event the junior subordinated debentures
are redeemable at 100% of principal amount in whole or in part, commencing
January 31, 2003. The Preferred Securities are subject to mandatory redemption,
in whole or in part as applicable, upon the repayment of the junior subordinated
debentures. The proceeds from the securities, to the extent invested in common
stock of the Bank, are considered to be tier 1 capital for regulatory purposes.
Of the net proceeds of $27.4 million from the sale of the Preferred Securities,
the Company invested $25 million in common stock of the Bank. The Preferred
Securities are traded on the Nasdaq National Market system under the symbol
"FFFLP."
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at September 30, 1998
and the results of its consolidated operations and cash flows for the period
then ended, all of which are of a normal and recurring nature, have been
included.
In February, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which standardizes
the disclosure requirements for pensions and other postretirement benefits;
requires additional information on changes in the benefit obligations and fair
values of plan assets; and eliminates certain present disclosure requirements.
The Statement does not change the measurement or recognition requirements for
postretirement benefits. SFAS no. 132 is effective for fiscal years beginning
after December 15, 1997 and, accordingly, will be adopted by the Company in the
year ending December 31, 1998. Management does not expect that this standard
will significantly affect the Company's financial reporting.
In June, 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met,
a derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and, accordingly, would apply to the
Company beginning on April 1, 2000. The Company plans to adopt the standard at
that time and does not presently intend to reclassify securities between
categories. The Company has not engaged in derivatives and hedging activities
covered by the
6
<PAGE>
new standard, and does not expect to do so in the foreseeable future.
Accordingly, SFAS No. 133 is not expected to have a material impact on the
Company's financial statements.
In October, 1998 the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities". Statement No. 65, as amended by Statement No. 115
and Statement No. 125, required that after securitization of a mortgage loan
held for sale, a mortgage banking enterprise classify the resulting security as
a trading security. Statement No. 134 amends this section to require that after
the securitization of mortgage loans held for sale, the entity classify the
resulting mortgage-backed security or other retained interests based on its
ability and intent to sell or hold those investments. SFAS 134 is effective for
the first quarter beginning after December 15, 1998 and accordingly would apply
to the Company for the quarter ended March 31, 1999. The Company has not
engaged in retaining securities after the securitization of its mortgage loans
held for sale and does not expect to do so in the foreseeable future.
Accordingly, SFAS No. 134 is not expected to have a material impact on the
Company's financial statements.
Certain amounts in the financial statements have been reclassified to conform
with the September 30, 1998 presentation.
On August 31, 1998, the Company announced its plan to commence a stock
repurchase program to acquire up to 340,000 shares of the Company's Common
Stock, which represents approximately 5% of the outstanding Common Stock. At
September 30, 1998, the Company had repurchased 40,000 shares of Common Stock at
an average price of $24.03 per share.
On January 30, 1998, the Bank acquired an office building in downtown West Palm
Beach for $6.6 million from NationsBank. While the seller has leased back most
of the building for a period of up to two years, it is the intent of the Company
to locate its corporate headquarters in this building in an effort to better
serve the community.
2. LOANS RECEIVABLE
Loans receivable at December 31, 1997 and September 30, 1998, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
================================
(IN THOUSANDS)
<S> <C> <C>
One-to-four single family, residential real estate
mortgages........................................................... $717,610 $ 797,109
Commercial real estate mortgages......................................... 64,525 74,272
Real estate construction-primarily residential........................... 38,577 45,872
Participations-primarily residential..................................... 3,172 2,473
Land loans-primarily residential......................................... 12,116 10,080
----------------- ------------
Total first mortgage loans.......................................... 836,000 929,806
Consumer and commercial business loans................................... 80,468 83,945
----------------- ------------
Total gross loans................................................... 916,468 1,013,751
Less:
Undisbursed portion of loans in process............................. 54,471 76,776
Unearned discounts, premiums and deferred loan
fees, net........................................................ (2,554) (3,259)
Allowance for loan losses........................................... 3,294 3,144
----------------- ------------
Loans receivable-net..................................................... $861,257 $ 937,090
================= ============
</TABLE>
7
<PAGE>
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1997 and the three and nine months ended September 30, 1997 and
1998, is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998 1997 1998
================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.................. $2,263 $2,109 $3,142 $2,263 $3,294
Increase in allowance due to purchase
of BankBoynton.............................. 1,167 - - - -
Current provision (recovery).................... 170 57 6 129 (43)
Charge-offs..................................... (306) (19) (4) (245) (107)
------------- ------------------------------- ------------------------------
Ending balance.................................. $3,294 $2,147 $3,144 $2,147 $3,144
============= =============================== ==============================
</TABLE>
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
===================================================
LOAN RELATED LOAN RELATED
BALANCE ALLOWANCE BALANCE ALLOWANCE
---------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Impaired loan balances and related
specific valuation allowances:
Loans performing in conformity with
contractual terms.............................. $ 740 $ 165 $ 427 $ 185
Loans for which interest income is
not being recognized........................... 2,940 - 4,411 -
----------------------- ----------------------
Total........................................ $ 3,680 $ 165 $ 4,838 $ 185
======================= ======================
</TABLE>
The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
8
<PAGE>
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Savings Bank of Florida, is a
regulated financial institution. Its regulatory capital amounts and ratios are
presented in the following table:
<TABLE>
<CAPTION>
MINIMUM FOR
CAPITAL ADEQUACY
ACTUAL PURPOSES
------------------------------------------------------------
RATIO AMOUNT RATIO AMOUNT
------------------------------------------------------------
(Dollars In Thousand)
<S> <C> <C> <C> <C>
As of September 30, 1997 Stockholders' Equity
and ratio to total assets................................... 8.1% $ 84,294
==========
Net unrealized increase in market value of assets
available for sale (net of applicable income taxes)......... (1,290)
Goodwill......................................................... (543)
Disallowed servicing assets and deferred tax assets.............. (24)
------------
Tangible capital and ratio to adjusted total assets.............. 7.9% $ 82,437 1.5% $15,642
========== ============ ========== ==========
Tier 1 (core) capital and ratio to adjusted
total assets................................................ 7.9% $ 82,437 3.0% $31,285
========== ============ ========== ==========
Tier 1 (core) capital and ratio to risk-weighted
total assets................................................ 15.4% $ 82,437
==========
Allowable Tier 2 capital:
General loan valuation allowances........................... 1,822
Equity investments.......................................... (1)
Total risk-based capital and ratio to risk-weighted
total assets........................................... 15.8% $ 84,258 8.0% $42,776
========== ============ ========== ==========
Total assets..................................................... $1,044,688
============
Adjusted total assets............................................ $1,042,831
============
Risk-weighted assets............................................. $ 534,705
============
As of September 30, 1998 Stockholders' Equity
and ratio to total assets................................... 7.9% $ 118,459
==========
Net unrealized increase in market value of assets
available for sale (net of applicable income taxes)......... (1,914)
Goodwill......................................................... (2,464)
Disallowed servicing assets and deferred tax assets.............. (52)
------------
Tangible capital and ratio to adjusted total assets.............. 7.6% $ 114,029 1.5% $22,383
========== ============ ========== ==========
Tier 1 (core) capital and ratio to adjusted
total assets................................................ 7.6% $ 114,029 3.0% $44,767
========== ============ ========== ==========
Tier 1 (core) capital and ratio to risk-weighted
total assets................................................ 14.8% $ 114,029
==========
Allowable Tier 2 capital:
General loan valuation allowances........................... 2,242
Equity investments.......................................... -
------------
Total risk-based capital and ratio to risk-weighted
total assets........................................... 15.0% $ 116,271 8.0% $61,817
========== ============ ========== ==========
Total assets..................................................... $1,496,647
============
Adjusted total assets............................................ $1,492,217
============
Risk-weighted assets............................................. $ 772,715
============
<CAPTION>
TO BE CONSIDERED
WELL CAPITALIZED
FOR PROMPT CORRECTIVE
ACTION PROVISIONS
--------------------------------
RATIO AMOUNT
--------------------------------
<S> <C> <C>
As of September 30, 1997 Stockholders' Equity
and ratio to total assets...................................
Net unrealized increase in market value of assets
available for sale (net of applicable income taxes).........
Goodwill
Disallowed servicing assets and deferred tax assets..............
Tangible capital and ratio to adjusted total assets..............
Tier 1 (core) capital and ratio to adjusted
total assets................................................ 5.0% $52,142
========== ===========
Tier 1 (core) capital and ratio to risk-weighted
total assets................................................ 6.0% $32,082
========== ===========
Allowable Tier 2 capital:
General loan valuation allowances...........................
Equity investments..........................................
Total risk-based capital and ratio to risk-weighted
total assets........................................... 10.0% $53,471
========== ===========
Total assets.....................................................
Adjusted total assets............................................
Risk-weighted assets.............................................
As of September 30, 1998 Stockholders' Equity
and ratio to total assets...................................
Net unrealized increase in market value of assets
available for sale (net of applicable income taxes).........
Goodwill
Disallowed servicing assets and deferred tax assets..............
Tangible capital and ratio to adjusted total assets..............
Tier 1 (core) capital and ratio to adjusted
total assets................................................ 5.0% $74,611
========== ===========
Tier 1 (core) capital and ratio to risk-weighted
total assets................................................ 6.0% $46,363
========== ===========
Allowable Tier 2 capital:
General loan valuation allowances...........................
Equity investments..........................................
Total risk-based capital and ratio to risk-weighted
total assets........................................... 10.0% $77,272
========== ===========
Total assets.....................................................
Adjusted total assets............................................
Risk-weighted assets.............................................
</TABLE>
9
<PAGE>
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the three months ended September 30, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 1997
-------------------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=============================================================
<S> <C> <C> <C>
(Dollars in Thousands)
Net income..................................... $2,010,000
===================
Basic EPS:
Income available to
common stockholders........................ $2,010,000 6,669,288 $0.30
=================== ==================
Effect of diluted shares:
Common stock options....................... 120,889
------------------
Diluted EPS:
Income available to
common stockholders........................ $2,010,000 6,790,177 $0.30
=================== ================== ==================
<CAPTION>
For the Three Months Ended
September 30, 1998
-------------------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=============================================================
<S> <C> <C> <C>
(Dollars in Thousands)
Net income..................................... $2,140,000
===================
Basic EPS:
Income available to
common stockholders........................ $2,140,000 6,725,320 $0.32
=================== ==================
Effect of diluted shares:
Common stock options....................... 100,322
------------------
Diluted EPS:
Income available to
common stockholders........................ $2,140,000 6,825,642 $0.31
=================== ================== ==================
</TABLE>
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the nine months ended September 30, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1997
-------------------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=============================================================
<S> <C> <C> <C>
(Dollars in Thousands)
Net income..................................... $4,709,000
===================
Basic EPS:
Income available to
common stockholders........................ $4,709,000 6,653,147 $0.71
=================== ==================
Effect of diluted shares:
Common stock options....................... 120,889
------------------
Diluted EPS:
Income available to
common stockholders........................ $4,709,000 6,774,036 $0.70
=================== ================== ==================
<CAPTION>
For the Nine Months Ended
September 30, 1998
-------------------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=============================================================
<S> <C> <C> <C>
(Dollars in Thousands)
Net income..................................... $6,226,000
===================
Basic EPS:
Income available to
common stockholders........................ $6,226,000 6,715,266 $0.93
=================== ==================
Effect of diluted shares:
Common stock options....................... 105,488
------------------
Diluted EPS:
Income available to
common stockholders........................ $6,226,000 6,820,754 $0.91
=================== ================== ==================
</TABLE>
Pursuant to Statement of Position (SOP), 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
10
<PAGE>
6. OTHER COMPREHENSIVE INCOME
An analysis of the changes in Accumulated Other Comprehensive Income for the
periods ended September 30, 1997 and 1998, is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
--------------------------------- ---------------------------------
UNREALIZED UNREALIZED
GAINS (LOSSES) GAINS (LOSSES)
ON SECURITIES ON SECURITIES
==============================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance......................... $ 795 $1,552 $ 782 $1,405
Current-period change..................... 495 362 508 509
------------ ------------ ------------- -------------
Ending balance............................ $1,290 $1,914 $1,290 $1,914
============ ============ ============= =============
</TABLE>
An analysis of the related tax effects allocated to Other Comprehensive Income
is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
--------------------------------- -----------------------------------
TAX TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
========================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period.................................... $ 1,541 $ (632) $ 909 $ 1,045 $ (397) $ 648
Less: reclassification adjustment for gains
realized in net income........................ (702) 288 (414) (461) 175 (286)
--------------------------------- -----------------------------------
Other comprehensive income.......................... $ 839 $ (344) $ 495 $ 584 $ (222) $ 362
================================= ===================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
--------------------------------- -----------------------------------
TAX TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
========================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period.............................. $ 1,563 $ (641) $ 922 $ 1,798 $ (683) $ 1,115
Less: reclassification adjustment for gains
realized in net income..................... (702) 288 (414) (977) 371 (606)
-------------------------------- -----------------------------------
Other comprehensive income....................... $ 861 $ (353) $ 508 $ 821 $ (312) $ 509
================================= ===================================
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Savings Bank of Florida (the "Bank"). The Company conducts no business
other than holding the common stock of the Bank. Consequently, its net income
is derived from the Bank. The Bank's net income is primarily dependent on its
net interest income, which is the difference between interest income earned on
its investments in mortgage loans and mortgage-backed securities, other
investment securities and loans, and its cost of funds consisting of interest
paid on deposits and borrowings. The Bank's net income also is affected by its
provision for loan losses, as well as by the amount of other income, including
income from fees and service charges, net gains and losses on sales of
investments, and operating expense such as employee compensation and benefits,
deposit insurance premiums, occupancy and equipment costs, and income taxes.
Earnings of the Bank also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Bank. In particular, the general level of market
interest rates tends to be highly cyclical.
RECENT DEVELOPMENTS.
On August 31, 1998, the Company announced its plan to commence a stock
repurchase program to acquire up to 340,000 shares of the Company's Common
Stock, which represents approximately 5% of the outstanding Common Stock. At
September 30, 1998, the Company had repurchased 40,000 shares of Common Stock at
an average price of $24.03 per share.
On January 21, 1998, the Company issued $28.375 million of mandatorily
redeemable, Preferred Securities out of a grantor trust, Fidelity Capital Trust
I, a Delaware statutory trust, which was created by the Company for this sole
purpose. As its only asset, the trust holds junior subordinated debentures due
January 31, 2028 of the Company, purchased with the proceeds of the preferred
security's issuance. Interest from the junior subordinated debt securities is
payable quarterly at a rate of 8.375%, annually. The interest will be used to
fund distributions quarterly at the rate of 8.375% on the Preferred Securities.
As a result of the above, the Preferred Securities of the trust are considered
fully and unconditionally guaranteed by the Company.
Distributions on the Preferred Securities are cumulative and are payable at the
same rate as the junior subordinated debentures, described above. The junior
subordinated debentures are redeemable in whole, in the event the Company's
mutual holding company parent converts to stock form beginning January 31, 2000
at 107% of principal amount and in any event the junior subordinated debentures
are redeemable at 100% of principal amount in whole or in part, commencing
January 31, 2003. The Preferred Securities are subject to mandatory redemption,
in whole or in part as applicable, upon the repayment of the junior subordinated
debentures. The proceeds from the securities, to the extent invested in common
stock of the Bank, are considered to be tier 1 capital for regulatory purposes.
Of the net proceeds of $27.4 million from the sale of the Preferred Securities,
the Company invested $25 million in common stock of the Bank. The Preferred
Securities are traded on the Nasdaq National Market system under the symbol
"FFFLP."
On January 30, 1998, the Bank acquired an office building in downtown West Palm
Beach for $6.6 million from NationsBank. While the seller has leased back most
of the building for a period of up to two years, it is the intent of the Company
to locate its corporate headquarters in this building in an effort to better
serve the community.
13
<PAGE>
OTHER COMPREHENSIVE INCOME.
Accumulated Other Comprehensive Income for the nine months ended September 30,
1998 increased by $1,115,000 which was offset by the reclassification of
$606,000 of such gains included in net income for the period, resulting in an
aggregate increase of $509,000. This increase in the market value of Assets
Available for Sale, resulted from a modest decrease in market interest rates for
these instruments. The increase in Accumulated Other Comprehensive Income for
the nine months ended September 30, 1997 of $508,000, which consisted of an
increase in the market value of Assets Available for Sale, resulted from a
modest decrease in market interest rates on similar instruments.
Accumulated Other Comprehensive Income for the quarter ended September 30, 1998
increased by $648,000 which was offset by the reclassification of $286,000 of
such gains included in net income for the quarter, resulting in an aggregate
increase of $362,000. This increase in the market value of Assets Available for
Sale, resulted from a modest decrease in market interest rates for these
instruments. The increase in Accumulated Other Comprehensive Income for the
quarter ended September 30, 1997 of $495,000, which consisted of an increase in
the market value of Assets Available for Sale, resulted from a decrease in
market interest rates on similar instruments.
RESULTS OF OPERATIONS.
Net income for the nine months ended September 30, 1998 was $6.2 million, an
increase of $1.5 million when compared to $4.7 million for the nine months ended
September 30, 1997. The primary reasons for this increase, as more fully
described later herein, were an increase in net interest income of $2.7 million
and an increase in other income of $2.9 million. Offsetting these increases was
an increase in operating expenses of $3.6 million and an increase in provision
for income taxes of $609,000 due to increased income.
Net income for the quarter ended September 30, 1998 was $2.1 million,
representing an increase of $130,000 when compared to $2.0 million for the same
quarter ended September 30, 1997. The primary reasons for this increase, as
more fully described later herein, were an increase in net interest income of
$613,000 and an increase in other income of $636,000. Offsetting these factors
was an increase in operating expenses of $1.3 million. Also contributing to the
increase was a decrease in provision for loan losses and a decrease in the
provision for income taxes.
INTEREST INCOME.
Interest income for the nine months ended September 30, 1998, totaled $72.8
million, representing an increase of $20.4 million or 39.0% compared to the same
1997 period. The primary reasons for this increase was an increase in the
Bank's interest income from loans of $11.0 million and from mortgage-backed
securities of $8.0 million. The increase in interest income from loans was
primarily the result of an increase in the average balance of these loans to
$904.2 million from $713.3 million for the periods ended September 30, 1998 and
1997, respectively. The increase in interest income from mortgage-backed
securities was due to an increase in the average balance on these securities of
$184.7 million, which was partially offset by a decline in the average yield of
such securities to 6.32% in 1998 from 6.95% in 1997. The increase in these
average assets was funded mainly through an increase in the Bank's deposits
along with the issuance of $28.7 million of subordinated debentures. The Bank's
interest income from investment securities and other investments also increased
by $241,000 and $1,092,000, respectively. These increases resulted from an
increase in the average balance of investment securities to $18.4 million from
$11.6 million and an increase in the average balance of other investments to
$50.5 million from $29.3 million for the periods ended September 30, 1998 and
1997, respectively. These increases were slightly offset by a decrease in the
average yield on investment securities to 5.64% in 1998 from 6.20% in 1997.
14
<PAGE>
Interest income for the quarter ended September 30, 1998, totaled $25.5 million,
an increase of $6.8 million or 36.5% from the same quarter in 1997. The
principal reasons for this increase was an increase in interest income on the
Bank's loans of $3.1 million and an increase in interest income on the Bank's
mortgage-backed securities of $3.2 million. The increase from loans resulted
from an increase in the average balance of these loans to $924.6 million for the
quarter ended September 30, 1998 compared to $750.3 million for the comparable
1997 quarter. The increase from mortgage-backed securities resulted from an
increase in the average balance of these securities to $406.3 million for the
quarter ended September 30, 1998 from $179.3 million for the same quarter in
1997. Interest income also increased on investment securities and other
investments by $83,000 and $442,000, respectively. These increases resulted
from an increase in the average balance of investment securities to $19.0
million from $12.4 million and an increase in the average balance of other
investments to $54.7 million from $28.2 million for the quarters ended September
30, 1998 and 1997, respectively.
INTEREST EXPENSE.
Interest expense for the nine months ended September 30, 1998, totaled $47.4
million, an increase of $17.7 million or 59.8% from the same period in 1997.
The reasons for this increase were an increase in interest expense on borrowed
funds of $9.6 million, of which approximately $1.7 million is attributable to
interest on the Company's subordinated debenture securities, and an increase in
interest expense on deposits of $8.1 million. The increase in interest expense
on borrowed funds resulted from an increase in the average balance of these
funds to $309.0 million for the nine months ended September 30, 1998 compared to
$102.3 million for the comparable 1997 period. This was slightly offset by a
decrease in the average cost of borrowed funds to 6.31% from 6.53% for the nine
months ended September 30, 1998 and 1997, respectively. The increase in
interest expense on deposits resulted from an increase in the average balance of
these deposits to $962.5 million from $752.4 million and an increase in the
average cost of these deposits to 4.55% from 4.38% for the periods ending
September 30, 1998 and 1997, respectively.
Interest expense was $17.1 million for the quarter ended September 30, 1998,
representing a $6.2 million or 57.2% increase when compared to the same quarter
in 1997. The principal cause for this increase was an increase in interest
expense on borrowed funds of $3.2 million, of which approximately $600,000 is
attributable to interest on the Company's subordinated debenture securities. As
a result of the subordinated debenture issue and additional FHLB borrowings, the
Company experienced an increase in the average balance of such funds to $339.8
million for the quarter ended September 30, 1998 compared to $128.1 million for
the same quarter in 1997. This was partially offset by a decrease in the average
cost of borrowed funds to 6.17% from 6.35% for the quarters ended September 30,
1998 and 1997, respectively. Interest expense on deposits also increased by $3.0
million. This was caused by an increase in the average balance of deposits to
$1.0 billion for the quarter ended September 30, 1998 compared to $785.8 million
for the same quarter in 1997 and an increase in the average cost to 4.62% from
4.49% for the quarters ended September 30, 1998 and 1997, respectively.
NET INTEREST INCOME.
While the Bank's interest income increased by $20.4 million for the nine months
ended September 30, 1998, compared to the same period in 1997, interest expense
also increased by $17.7 million, resulting in net interest income of $25.3
million for the period ended September 30, 1998. This represents a $2.7 million
or 11.7% increase in net interest income when compared to the same period in
1997.
During the quarter ended September 30, 1998, the Bank's interest income
increased by $6.8 million compared to the same quarter in 1997, while interest
expense increased by $6.2 million, resulting in net interest income of $8.4
million for the quarter ended September 30, 1998, $613,000 or 7.8% more than
realized in 1997.
15
<PAGE>
PROVISION FOR LOAN LOSSES.
The Bank maintains an allowance for loan losses based upon management's estimate
of the fair value of collateral, as applicable, current and anticipated future
economic conditions, and the Bank's actual loss experience and guidelines
applied by the OTS and FDIC. The Bank experienced a credit provision for loan
losses of $43,000 for the nine months ended September 30, 1998 compared to a
charge against income of $129,000 for the nine months ended September 30, 1997.
The credit provision for loan losses for the nine months ended September 30,
1998 primarily resulted from the payoff of several delinquent loans on which the
Bank had previously provided specific loan loss allowances. The Bank's total
allowance for loan losses as a percentage of net loans receivable was
approximately .34% at September 30, 1998 which management believes to be
adequate considering the Bank's loan composition and historical loss experience.
The provision for loan losses was $6,000 for the quarter ended September 30,
1998, compared to $57,000 for the quarter ended September 30, 1997. The
provision for the quarter ended September 30, 1998 is deemed adequate by
management in light of the Bank's historical loan loss experience.
OTHER INCOME.
Other income for the nine months ended September 30, 1998 was $6.6 million or
$2.9 million more than the same period in 1997. This increase is primarily
attributable to a gain of $634,000 on the sale of the Bank's wholesale loan
production in June, 1998 and mortgage-backed securities in March, 1998, the
sales of which are reflected in the Company's $2.0 million net gain on sale of
loans, investments and mortgage-backed securities. This increase also resulted
from an increase in the Bank's servicing income and other fees of $835,000 and
an increase in other miscellaneous income of $926,000 for the nine months ended
September 30, 1998 and 1997, respectively. The primary reasons for the increase
in miscellaneous income was $447,000 of rental income received from NationsBank
for leasing back most of the downtown property acquired from them in January of
1998 and recognition of income from the maturing of a $355,000 option on the
sale of the Bank's downtown property.
Other income for the quarter ended September 30, 1998 was $2.4 million, an
increase of $636,000 compared to the same quarter in 1997. The principal cause
for this increase was an increase in other miscellaneous income of $591,000.
This increase was due to the maturing of a $355,000 option to purchase by the
buyers of the Bank's property in downtown West Palm Beach, which the Bank
recorded as income. The remaining increase was due in part to rental income
received on leasing back the newly acquired office building to NationsBank.
Also contributing to this increase was an increase in servicing income and other
fees of $286,000. Partially offsetting these increases was a decrease in net
gain on sale of loans, investments and mortgage-backed securities of $241,000 to
$555,000 from $796,000 for the quarters ended September 30, 1998 and 1997,
respectively.
OPERATING EXPENSE.
Operating expenses increased by $3.6 million to $21.7 million for the nine
months ended September 30, 1998 as compared to the same nine months ended
September 30, 1997. Employee compensation and benefits represent $1.6 million
of this increase. The principal cause of this increase are commissions to loan
officers which are greater in 1998 compared to 1997 due to increased loan
volume, additional personnel to staff two offices which were opened subsequent
to June, 1997, additional customer service personnel as a result of the Bank's
31% increase in deposits during the past year, together with normal salary
increases. The Bank's occupancy and equipment cost for the nine months ended
September 30, 1998 were $859,000 more than experienced in 1997. Contributing to
this increase are approximately $142,000 pertaining to expenses of the Bank's
new office building acquired in January, 1998, $73,000 relating to rent expenses
on certain properties acquired in the BankBoynton acquisition and approximately
$56,000 in costs to operate a new branch office and a new loan production office
which opened subsequent to September 30, 1997. Also contributing to the
increase in operating expense were increases in marketing costs of $100,000,
federal deposit insurance premiums of $70,000 and other operating expenses of
$967,000, which includes $122,000 of amortization of goodwill related to the
16
<PAGE>
acquisition of BankBoynton. These increases were only slightly offset by a
decrease in losses on real estate owned of $30,000 for the nine months ended
September 30, 1998 when compared to the same nine months in 1997.
Operating expenses increased by $1.3 million to $7.4 million for the quarter
ended September 30, 1998 as compared to the quarter ended September 30, 1997.
Employee compensation and benefits increased by $586,000 which, as explained
above, is primarily attributable to an increase in commissions to loan officers
due to increased loan volume, additional customer service personnel and normal
salary increases. Occupancy and equipment costs increased by $283,000 due
partly, as stated above, to expenses on the Bank's new office building, rent
expenses on certain properties acquired in the BankBoynton acquisition along
with costs of operating a new office opened subsequent to September 30, 1997.
In addition, there were increases in marketing costs of $9,000, federal deposit
insurance premiums of $24,000 and other operating expense of $347,000 for the
quarters ended September 30, 1998 and 1997, respectively. Included in the
increase in other operating expense is $40,000 of amortization of goodwill
relating to the acquisition of BankBoynton. Partially offsetting these
increases was a decrease in the loss on real estate owned of $47,000.
INCOME TAXES.
Provision for incomes taxes increased by $609,000 to $4.1 million for the nine
ended September 30, 1998 from $3.5 million for the comparable 1997 period. This
increase was attributable to an increase in income before provision for income
taxes of $2.1 million to $10.3 million in 1998 from $8.2 million in 1997. These
expenses approximate the rates paid by the Company for Federal and State income
taxes applied to the Company's pre-tax income.
Provision for income taxes was $1.4 million for the quarter ended September 30,
1998 compared to $1.5 million for the quarter ended September 30, 1997. These
expenses approximate the rates paid for Federal and State income taxes applied
to the Company's pre-tax income.
ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS.
At September 30, 1998, the Bank's total interest-bearing assets maturing or
repricing within one year exceeded total interest-earning liabilities maturing
or repricing in the same period by $20.5 million, representing a cumulative one-
year gap ratio of a positive 1.4%. This compares to a negative gap ratio of
10.4% at December 31, 1997, at which date the Bank had total interest bearing
liabilities maturing or repricing within one year that exceeded total interest-
earning assets maturing or repricing during the same period by $126.6 million.
The Bank has an Asset-Liability Management Committee, which is responsible for
reviewing the Bank's assets and liability policies. The Committee meets weekly
and reports monthly to the Board of Directors on interest rate risks and trends,
as well as liquidity and capital ratios and requirements.
LIQUIDITY AND CAPITAL RESOURCES.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 4.0%. The
Bank's liquidity ratio averaged 6.80% during the month of September 1998.
Liquidity ratios averaged 6.23% for the quarter ended September 30, 1998. The
Bank adjusts its liquidity levels in order to meet funding needs of deposit
outflows, payment of real estate taxes on mortgage loans, and repayment of
borrowings and loan commitments. The Bank also adjusts liquidity as appropriate
to meet its asset and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities and other short-term investments, as well
as earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions
17
<PAGE>
and competition. The Bank manages the pricing of its deposits to maintain a
desired deposit balance. In addition, the Bank invests excess funds in short-
term interest-earning and other assets, which provide liquidity to meet lending
requirements. Short-term interest-bearing deposits with the FHLB of Atlanta
amounted to $42.1 million and $32.4 million at September, 30, 1998 and December
31, 1997, respectively. Other assets qualifying for liquidity at September 30,
1998 and December 31, 1997, amounted to $26.0 million and $24.8 million,
respectively. For additional information about cash flows from the Company's
operating, financing and investing activities, see Consolidated Statements of
Cash Flows included in the Financial Statements. A major portion of the Bank's
liquidity consists of cash and cash equivalents, which are a product of its
operating, investing and financing activities. The primary sources of cash were
net income, principal repayments on loans and mortgage-backed securities,
increases in deposit accounts and additional advances from the FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At September 30, 1998, the Bank had $305.1 million in advances
from the FHLB. At September 30, 1998, the Bank had commitments outstanding to
originate or purchase loans of $56.9 million. This amount does not include the
unfunded portion of loans in process. Certificates of deposit scheduled to
mature in less than one year at September 30, 1998, totaled $498.0 million.
Based on prior experience, management believes that a significant portion of
such deposits will remain with the Bank.
YEAR 2000 PREPARATIONS.
The Bank formed a Year 2000 Committee in March 1997, which meets monthly to
review the Bank's plan to achieve compliance with the issues associated with the
year 2000 and progress to date and report such progress to the Board of
Directors. The Bank's Year 2000 Project Plan includes five phases; assessment,
evaluation, renovation, validation and implementation. The Bank has completed
the assessment and evaluation phases and has begun the renovation and validation
phases for its internal applications and systems. Management of the Bank
believes all "mission critical" applications have been identified. To the
extent applications suppliers assert their applications are year 2000 ready, the
Bank is currently testing and validating their claims, while working toward
solutions with others. Management has concluded that the cost of modernizing
the Bank's computer hardware and software, on an accelerated basis, will cost
approximately $2.3 million, of which approximately $797,000 has already been
incurred. These costs are being capitalized and expensed in conformity with
generally accepted accounting principles.
The Bank contracts with a data processing service bureau, FiServ-Orlando to
provide all direct processing of the Bank's loan and deposit transactions,
together with calculations of interest income and expense thereon. Management
of the Bank is in regular contact with the service bureau and closely monitors
the service bureau's reports on its progress in becoming year 2000 ready. Based
on its most recent report, this service bureau asserts it has completed the
assessment and evaluation phases. With respect to the renovation phase, the
service bureau reports substantial progress on seven of eleven applications.
The testing and implementation phases have been begun in several applications.
While the service bureau assures Management of the Bank that it will achieve
year 2000 readiness by 1999, Management is unable to predict whether the service
bureau will achieve year 2000 readiness on a timely basis or the magnitude of
the financial consequences to the Bank in the event of the service bureau's
failure to achieve such readiness. Consequently, the Bank has contacted other
providers of such data processing services, who assert they are year 2000 ready,
to determine the latest possible date the Bank could convert to their systems.
The Bank is currently working on contingency plans which address operational
policies and procedures in the event of data processing, electrical power supply
and/or phone service failures associated with the year 2000. In addition, the
Bank has organized a local financial institutions "user group", comprised of
financial institutions in Palm Beach, Broward, Martin, St. Lucie and Indian
River counties of Florida. The purpose of the group is to meet and share ideas
and solutions for solving issues associated with the year 2000.
18
<PAGE>
CHANGES IN FINANCIAL CONDITION.
The Company's assets increased by $278.2 million from December 31, 1997 to
September 30, 1998. Net loans receivable increased by $75.8 million. In
addition, assets available for sale, principally mortgage-backed securities,
increased by $176.0 million, while the Bank's office properties increased by
$12.4 million due in part to the acquisition of an office building. Funds for
the increase in assets were provided by an increase in the Bank's deposits of
$165.4 million, advances from the FHLB of $66.0 million and increases in all
other liabilities of $14.2 million. As stated earlier, the Company issued
$28.75 million of junior subordinated debentures in January, 1998 and invested
$25 million in common stock of the Bank. This investment, which increased the
Bank's total equity, has allowed the Bank to continuing growing and leveraging
this growth through increased borrowings from the Federal Home Loan Bank and
through an increase in the Bank's deposits, as noted above. The Company's
equity at September 30, 1998 increased by $3.9 million from December 31, 1997 as
a result of net income for the nine months of $6.2 million plus a change in the
fair value of assets available for sale, net of applicable income taxes of
$509,000. This amount was offset by dividends declared for the nine months of
$2.5 million.
FASB STATEMENT ON EMPLOYER DISCLOSURES ABOUT PENSIONS AND POSTRETIREMENT
BENEFITS - In February, 1998, the FASB issued SFAS No. 132 which standardizes
the disclosure requirements for pensions and other postretirement benefits;
requires additional information on changes in the benefit obligations and fair
values of plan assets; and eliminates certain present disclosure requirements.
The Statement does not change the measurement or recognition requirements for
postretirement benefits. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997 and, accordingly, will be adopted by the Company in the
year ending December 31, 1998. Management does not expect that this standard
will significantly affect the Company's financial reporting.
FASB STATEMENT ON DERIVATIVES AND HEDGING ACTIVITIES - In June, 1998, the FASB
issued SFAS No. 133 which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Statement requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. Entities may reclassify securities from the held-to-maturity
category to the available-for-sale category at the time adopting SFAS No. 133.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999 and, accordingly, would apply to the Company beginning on
April 1, 2000. The Company plans to adopt the standard at that time and does
not presently intend to reclassify securities between categories. The Company
has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to do so in the foreseeable future. Accordingly,
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
FASB STATEMENT ON MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION
OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE In October,
1998 the FASB issued SFAS No. 134 which amends SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities". Statement No. 65, as amended by Statement
No. 115 and Statement No. 125, required that after securitization of a mortgage
loan held for sale, a mortgage banking enterprise classify the resulting
security as a trading security. Statement No. 134 amends this section to
require that after the securitization of mortgage loans held for sale, the
entity classify the resulting mortgage-backed security or other retained
interests based on its ability and intent to sell or hold those investments.
SFAS 134 is effective for the first quarter beginning after December 15, 1998
and accordingly would apply to the Company for the quarter ended March 31, 1999.
The Company has not engaged in retaining securities after the securitization of
its mortgage loans held for sale and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 134 is not expected to have a material impact on
the Company's financial statements.
19
<PAGE>
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor
is the Company aware of any pending litigation, other than legal
proceedings incident to the business of the Company, such as foreclosure
actions filed on behalf of the Company. Management, therefore, believes
the results of any current litigation would be immaterial to the
consolidated financial condition or results of operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under Consolidated
Financial Statements (pages 2 through 5), Notes to Unaudited
Consolidated Financial Statements (pages 6 through 11) and
Management's Discussion and Analysis of Financial Condition and
Results of Operations (pages 12 through 19), and are incorporated
by reference, herein.
(b) Exhibits.
(27) Financial Data Schedule
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIDELITY BANKSHARES, INC.
Date: November 12, 1998 By: /s/ Vince A. Elhilow
----------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: November 12, 1998 By: /s/ Richard D. Aldred
-----------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 20,489
<INT-BEARING-DEPOSITS> 42,135
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 426,203
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 937,090
<ALLOWANCE> 3,144
<TOTAL-ASSETS> 1,498,442
<DEPOSITS> 1,037,727
<SHORT-TERM> 4,697
<LIABILITIES-OTHER> 30,927
<LONG-TERM> 333,820
680
0
<COMMON> 0
<OTHER-SE> 90,591
<TOTAL-LIABILITIES-AND-EQUITY> 1,498,442
<INTEREST-LOAN> 18,030
<INTEREST-INVEST> 270
<INTEREST-OTHER> 7,202
<INTEREST-TOTAL> 25,502
<INTEREST-DEPOSIT> 11,817
<INTEREST-EXPENSE> 5,238
<INTEREST-INCOME-NET> 8,447
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,369
<INCOME-PRETAX> 3,498
<INCOME-PRE-EXTRAORDINARY> 3,498
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,140
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 2.81
<LOANS-NON> 3,583
<LOANS-PAST> 0
<LOANS-TROUBLED> 117
<LOANS-PROBLEM> 4,152
<ALLOWANCE-OPEN> 3,225
<CHARGE-OFFS> (4)
<RECOVERIES> 0
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<ALLOWANCE-DOMESTIC> 902
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<ALLOWANCE-UNALLOCATED> 2,242
</TABLE>
